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CURRENCIES: Dollar Pulls Back, But Off Lows As U.S. Rate Expectations Shift Higher

CURRENCIES: Dollar Pulls Back, But Off Lows As U.S. Rate Expectations Shift Higher

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November 11, 2016

By Suryatapa Bhattacharya and Kosaku Narioka

The dollar fell back from overnight highs but remained strong Friday in Asia after investors pushed up the U.S. currency on expectations that any fiscal stimulus implemented by President-elect Donald Trump would lead to a faster pace of U.S. rate increases.

The dollar had sharply fallen Wednesday, when the surprising victory of the Republican candidate increased uncertainty over the economic and trade policies of the world's largest economy.

"Investors are less panicked now and starting to think about Trump's economic policies," said Yunosuke Ikeda, foreign-exchange strategist with Nomura Securities in Tokyo.

The dollar rose in part because of an unwinding of the positions to hedge against drops in the U.S. currency that some market participants had built up ahead of the election's outcome, some analysts said.

The prospect of a fiscal-stimulus program from Trump raised expectations that the U.S. economy will continue to improve and that the Federal Reserve will raise rates in December and then continue a tightening path. Higher interest rates on dollar-denominated assets tend to attract investment from abroad.

The dollar was at Yen106.55, compared with Yen106.79 late Thursday in New York. The dollar hit Yen106.95 overnight, the highest level since July 21. The British pound was at $1.2575, compared with $1.2554. The euro was at $1.0910 versus $1.0890.

Despite the possibility that U.S. fiscal stimulus could bolster the nation's economy and buoy inflation expectations, leading to further rate increases, questions have arisen over what sort of policies Mr. Trump would deliver. Ikeda said the Fed would be unlikely to raise rates if Trump ends up creating "supply-side shocks" to the economy such as imposing higher tariffs and scrapping trade agreements.